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Consumers’ credit scores may be overly penalized for medical debt that goes into collections and shows up on their credit report, according to a study released today by the federal Consumer Financial Protection Bureau.

The agency said credit scoring models may underestimate the creditworthiness of consumers who owe medical debt in collections. The scoring models also may not be crediting consumers who repay medical debt that has gone to collections.

“Getting sick or injured can put all sorts of burdens on a family, including unexpected medical costs. Those costs should not be compounded by overly penalizing a consumer’s credit score,” said bureau Director Richard Cordray. “Given the role that credit scores play in consumers’ lives, it’s important that they predict the creditworthiness of a consumer as precisely as possible.”

According to a study by the Federal Reserve Board, more than half of all collections on credit reports are associated with medical bills.

“In some instances, the consumer may not even be aware of a debt that has been sent to collections or that it is on their credit record,” the agency said. “A collection account generally can stay on a report for up to seven years.”

The study looked at 5 million anonymous credit records from September 2011 to September 2013 to assess how well a common credit score predicted a consumer’s future likelihood of paying back debt

To do that, the study looked at the credit histories and scores of consumers in September 2011 and then examined their actual loan payment patterns over the next two years.

“A significant part of financial capability is the ability to make ends meet through adequate savings,” said the report. “Having resources for immediate medical needs is also an important component.”

In Texas, 19 percent of individuals reported that over the past year, their household spent more than their income [not including the purchase of a new home, car or other big investment], while 30 percent reported having past-due medical bills.

“Individuals who are not balancing monthly income and expenses are not saving and thus may find themselves struggling to make ends meet,” the study said. “Overdue medical debt can further compound a household’s ability to meet monthly financial obligations.”

Here are other scary statistics about Texans:

• 57 percent of Texans don’t have any rainy-day savings to cover three months of unanticipated financial emergencies. This compares with 56 percent of other Americans.

• 34 percent of Texans reported making only the minimum payment on credit cards in the past year, compared with 34 percent of all Americans.

The State-by-State Financial Capability Survey collected data on financial behaviors across all 50 states and the District of Columbia.

The data were collected through an online survey of 25,509 American adults from July – October of last year. The sample used in the study was weighted by age, gender, ethnicity and education.

“It is an injustice that small medical bills, which are often confusing and inaccurate, can prevent an otherwise creditworthy consumer from qualifying for a mortgage, refinancing their home or buying a car,” said Plano mortgage banker Rodney Anderson, who’s been sounding the alarm about how medical debt can wreck a credit record.

Supporters of the legislation said medical debt is unique in that it’s not typically reported to credit bureaus by health care providers, even when bills are paid in a timely manner and paid in full.

Anderson said medical bills are typically reported to the credit bureaus only after they’ve been assigned to debt collectors.
That means that credit bureaus are receiving incomplete and biased information because they don’t receive data reflecting positive payment history, only the negative, supporters of the legislation said.